Prime Minister Tony Blair last night signalled that taxes would rise in the Budget to help pay for an upgraded National Health Service.

Taking part in a televised discussion which was part of the BBC's NHS day, Mr Blair said Chancellor Gordon Brown's April 17 financial statement would be a key point in the Government's efforts to revive the health service.

Mr Blair said: "In this forthcoming Budget there will be a very tough choice, not just for the politicians but actually for the country.

"If we want sustained investment in the National Health Service over a period of time, we are going to have to pay for it.

"And I believe that we should find that money. We will find it out of general taxation because the alternatives, which are social insurance - a tax on wages, private health care, which means you pay out of your pocket - are worse.

"In my view a fairer and better system is through general taxation. I hope in the coming months that we will be able to show we are prepared to make that commitment."

Mr Blair's announcement came on the day the Government's controversial private finance initiative suffered another blow when it was revealed that two new North-East hospitals were likely to merge.

Critics claimed officials had badly under-estimated the size of the University Hospital of North Durham, which was built with £97m of private money.

They claimed the plan - which will see it merge with the region's other privately financed (PFI) hospital in Bishop Auckland - was a "face saving" measure that would only make matters worse.

The controversial blueprint, which is due to go out for consultation, has been drawn up by top surgeon Professor Ara Darzi, who was called in to sort out a chronic beds shortage.

Prof Darzi, who is the Department of Health's advisor on surgery, has come up with a solution which will change the face of the NHS in County Durham and Darlington.

He hopes that the plan will enable County Durham hospitals to meet the challenge contained in the Government's NHS Plan.

But critics say the plan is fatally flawed and patients will vote with their feet and chose to be treated in Newcastle or Middlesbrough.

If the Darzi plan is accepted, it will mean the new £67m privately finance Bishop Auckland General Hospital - which is due to open shortly - will become the main centre for routine surgery in the county.

This will mean patients who want to avoid long waits at Durham or Darlington Memorial Hospital can have surgery at Bishop Auckland.

By taking away routine surgery from Durham and Darlington, it is hoped that it will ease the beds crisis within County Durham. It will also allow the development of more specialised services at Durham, including vascular surgery and angiography.

The move will also mean the transfer of paediatrics, the Special Care Baby Unit, emergency obstetrics and gynaecology from Bishop Auckland to Darlington.

The creation of a new hospital in Durham City has been dogged by criticism.

Opponents were unhappy that the Shotley Bridge general hospital was downgraded and services moved to the new unit.

They claimed that one hospital - no matter how good - would be unable to cope because the PFI-funded hospital was built with too few beds.

Is this the cure - Page 10